By John Warbuck
Molycorp (MCP) is a leader in the production of rare earths in the United States and has positioned itself favorably in the market this year by securing advance orders on 58% of its Phase I production quota while being able to utilize an additional 20% of that quota for the production of its proprietary water treatment products.
The company has moved ahead in an industry that is characterized by spot sales and managed to secure long term contracts that secure its profitability and ability to move its products. Molycorp is now in a position to expand its production and margins due to an increase in production of products that are key to renewable energy technologies.
Molycorp came into existence only four years ago, based out of Greenwood Village, Colorado, and specializes in the production of rare earth oxides that are required in the application of many green technologies, weapons, fiber optics, hard disk drives and water treatment products. Having access to such a broad scope of applications makes Molycorp's products extremely marketable, and the company has very minor competition from the Australian based Lynas Corporation (OTCQX:LYSCF) and the Chinese rare earth industry.
The rare earths Molycorp produces provide essential materials for the production of windmills, electric and hybrid cars, advanced electronics and the development of new technologies and sciences. Some of the material is also essential in the development of weapons technology and makes it a valuable commodity by giving Molycorp the opportunity to distribute its rare earth to defense contractors in the United States and abroad. The demand for these materials places Molycorp in an advantageous position as it continues to find its bearings as a new company.
The US Bureau of Land Management recently granted Molycorp rights to begin exploration of a deposit of heavy rare earths that is located in Mountain Pass, California, near Molycorp's heaviest production facility. 2012 could bode well for the Colorado based company as it solidifies its position and adds to its output over the year. Molycorp has yet to prove itself, however, and it came off of two consecutive years in the red before reaching profitability in 2011.
Both Molycorp and Lynas Corporation took hits in the last quarter of 2011, but the recent announcement of the US Bureau of Land Management's decision to allow the company to explore new excavation in Mountain Pass, California, could be exactly what it needs to find its way into profitability. Molycorp stock fell over the past year from $46 to $28, but news of its new operations has caused signs of life in the first two weeks of 2012. The stock is currently on an upswing, but there is still a level of uncertainty in the air as to whether the stock will continue on its current path.
If enough investors take interest in Molycorp and the company is able to post positive first quarter earnings, the stock could spike by midyear. Molycorp's main challenge is to remain profitable and consistent so that cautious investors gain enough confidence to take a position in the stock. 2011 was a critical year for the company as it bounced back from a loss of $49 million in 2010 to bring in revenues of $138 million in the first three quarters and a net income of $49 million. A single year of profitability still may not be enough to lure in enough investors to create much movement.
If you have a position in Molycorp I would hold it and watch the company closely over 2012. There is little at stake, and I doubt that the stock will lose. My only caution is that I am unsure of how much the stock will move at all in either direction, but I am convinced enough that I will not lose on the investment to take a position in it in hopes that it gains. Molycorp could very well be on the brink of a major movement this year, but I would rather play the option market than purchase stocks.
After a fourth quarter drop in the stock last year, Molycorp has fluctuated within $10 for the past several months when we first recommended it. I would collar the stock with call and put options in anticipation of some form of movement and capitalize on any significant spike or drop that occurs. If the stock posts favorable earnings in the first quarter, I would then make the decision to buy, but I'm not confident enough in Molycorp to make that decision without more observation beforehand. I'm simply not convinced by a single year of success, no matter how great the turnaround was, and I want to see more consistent growth before jumping into a new company whose fate is still to be determined.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.